Monthly Archives: December 2011

The Wizard of Omaha Pt.2

Warren Buffett noticed that because Graham got rid of the stocks so quickly, many of his “undervalued stocks” stayed undervalued. A handful of companies that Graham and Warren purchased that were sold under the 50% rule continued to grow and prosper year after year. The prices went up way above where they had been when Graham sold them.

As a result, Warren studied the financial statements of the companies that performed well. Warren learned that these all stars all shared the following strengths:

1) They sell a unique or service

2) They are the low-cost buyer and seller of a product

Selling a unique product: Coca-Cola. The producers of these products have placed the stories of their products in our minds. When you hear someone open up a Coke bottle, you think of a remedy of thirst.

Selling a unique service: Moody’s Corp. People need the services and are paying for it. It is instituational specific, and not people specific. A company does not have to spend big bucks redesigning its products.

Being the low-cost buyer: Nebraska Furniture Mart in Omaha. It is the low-cost buyer and seller. Their margins are traded for volume. The great volumes makes up for any decrease in margins.

These wonderful business attributes work in the companies’ favour, and there is very little chance of them going bankrupt.

Warren came up with the idea that one would purchase these stocks with such attributes and hold onto them faithfully.

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Felix Zulauf – Interviewed by King World

Felix Zulauf manages Zulauf Asset Management AG and has been on the Barron’s roundtable for 20 years.

Great interview by King World – check it out!

Felix Zulauf – Interview with King World

Summary:

– Buy gold if it dips more

– High risk of downside, with deeper magnitude than expected earlier

– 2012/2013 marked with European recession, 1 -3 countries exiting Euro, and chaos in Europe and hinted on a European crisis

– Stay liquid, and park money with risk averse banks with solid balance sheet

 

Alpha

Newt Gingrich to ignore courts if elected

Newt Gingrich made headlines again on December 18 that if he is elected, he will ignore some of the Supreme Court rulings that conflict with his decision. He is also willing to impeach judges and abolish certain courts if they continue to disagree with him.

Reading the Bill of Rights, three out of the ten amendments deal with judges and the judiciary system, and it implies that the judiciary plays a very important role in keeping the government in check. The amendments are as follows, per Wikipedia:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence.

In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any court of the United States, than according to the rules of the common law.

I do not know if this rhetoric is to gain momentarily public attention, or gain fringe votes, however it is a dangerous and foolish precedent by any presidential candidate. I believe that any candidate that is willing to dismiss the judiciary and does not believe in upholding the rule of law should not be discussed seriously. Imagine such a candidate being chosen as a president, then there will be severe ramifications as to what constitutes the rule of law? It will essentially be like any other dictatorship, as we have seen in the Arab Springs.

What are your thoughts?

 

Alpha

Gingrich causes a stir with vow to ignore courts (SMH)

 

BlackBerry Maker RIM is Going Through a Major Transition – Will it Take Them to the Top?

RIM and BlackBerry have been in the media all too often lately and mostly for the wrong reasons.  There has been lots of speculation as to the future of the company, and there is certainly a negative sentiment surrounding the organisation.  Why?  It has a lot to do with them not taking the competition seriously and adapting to the industry’s biggest changes.  But now they’re in the midst of a major transition.  Will it see them rise to the top and prove the media wrong?  It all boils down to “Can they execute?”

Let’s recap.

RIM essentially invented the smartphone and back in 2007 was sitting at the top of the industry.  Then came along Apple with the iPhone, and then there was the Android operating system backed by Google.  These new entrants changed the game by focusing on the consumer market instead of business clientele, and offered features that RIM ignored such as cameras, easy third party integration and better web browsing.  And to top it off, they were generally easier to use and nicer to look at.

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The Wizard of Omaha (Pt.I)

Every culture has its icon. Even though you may not know much about the culture, you can certainly “put a face” to it. In tennis, there is Roger Federer, in beauty, there is Audrey Hepburn, in jazz , there is Miles Davis. In technology and design, there is Steve Jobs (well, for all you Apple skeptics out there, I will say Bill Gates for the sake of your cynicism).

And in finance and investments, there is Omaha’s Mr.Warren Buffett.

Buffett’s private life is not much of an excitement to many; however, it is his doctrines that have proven to be historically essential. So, my focus will be on Buffett’s first art of value investing.  As for Warren’s private biography, let us leave that to the screenwriters who are preparing for the next made-for-TV biopic on Warren, shall we? (if one would ever be made).

Warren’s Mentor: Benjamin Graham

Prior to Buffett’s entrance to the stock market, Wall Street was considered largely as a casino where gamblers or speculators placed massive bets on the direction of stock prices. The speculative buy-sell frenzy was consistent during the roaring 20s. However the bull market did not last long. In 1929, the stock market crashed, and stock prices hit rock bottom. Line-ups to the hottest and latest jazz clubs were competing with lines at the soup kitchens.

In the early 1930s, a bright young analyst by the name of Benjamin Graham spotted a trend on wall street: Most traders were oblivious to the long-term economics of the businesses that were traded. According to Graham’s observations, stock prices were driven up to surreal levels as a result of speculative frenzies. The prices did not reflect the realities of these businesses. On the other hand, prices were also surreally low at certain times, and similarly did not reflect the business’ long term prospects.

Graham realized that he bought these stocks incorrectly valued at low prices. The market would eventually acknowledge the long term value of these companies. The prices will be revalued, and Graham could sell them at a profit.

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Financial Weapons of Mass Destruction: A Look At How Derivatives Work

Warren Buffett has once officially declared derivatives as “financial weapons of mass destruction”.

Derivatives? Oh no, I am not talking about high school calculus.

The Basics

A financial derivative that is a security that “derives” its value from another item or value. The most traditional derivatives are stock options, futures, forwards and swaps. However derivatives come in all shapes and sizes, and most recently we have seen something like Collateralized Debt Obligations or CDOs in the US and European markets.

CDOs were popular with bankers in the 2000’s, however they did not understand the risk associated with the instruments and losses can mount up as high as St.Agnes. CDOs are essentially any loans with a bundle of assets attached to them, which in the 2007 market debacle, were mortgages on houses.  The loan and the asset are usually grouped together and sold as a single instrument.

Traditional derivatives are more tried and true, hence they are more reliable to certain extent.

Options give owners the right to buy something at a certain value at a certain point in time.

Futures and forwards give investors the right to buy something at a certain value at a later date. A grape farmer can sell next year’s harvest by visiting the futures or forwards markets to someone who is willing to buy at a price set in advance (a counterparty). Terms for futures are standardized, unlike forwards. Future contracts correspond to other contracts, hence they can be traded on exchanges globally.

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